Business Irish

Friday 28 April 2017

CSO numbers show population, debt and GDP all on the rise

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Dan O'Brien

Dan O'Brien

Last week produced a blizzard of economic and economy-relevant data. Before looking at the eye-poppingly inflated, and internationally discussed, GDP figures, consider the other interesting figures that got somewhat less attention.

The size of the population and a country's labour force tell a lot about an economy and its capacity to grow. Thursday brought the publication of the first (and preliminary) national headcount in five years.

Of most interest from an economy and business perspective was a much bigger than anticipated increase in the population, and almost certainly the workforce, since 2011. That was because net outward migration was much smaller, indeed a fraction of what the demographers at the Central Statistics Office (CSO) had expected.

Among the economic consequences of the new figures will be a strengthening of the case for increased public expenditure. As it happens, quite a lot of data on the public finances were also published last week, including the fact that net public debt hit another record and continues to rise, as the first chart illustrates.

In the first quarter of 2016, the State's debt obligations (less its cash on hand) stood at €173bn, or more than €36,000 for every man, woman and child recorded on census night.

Since the economy turned around in 2012 it has grown by more than a quarter. This is not surprising, given that the Government has continued to spend more money than it takes in, despite the economy growing strongly. But it is more than a bit depressing as it shows that the long history of 'pro-cyclical' fiscal policy continues.

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The continued running of deficits and the building up of debt increases the risk that when the economy slumps (and because the business cycle is alive and well, it will slump sooner or later), the brakes will have to be slammed on to prevent the public finances slipping back into the danger zone.

Among the most worrisome aspects of the grossly inflated GDP figures is what it does to the most watched measure of the public finances. That measure is not the money value of government debt, but that debt as a percentage of GDP.

At a stroke last week, Ireland's gross debt went from being around average in the (indebted) Eurozone, at 94pc, to being one of the less indebted countries (at 80pc). This can only result in it becoming more difficult for this Government, and future ones, to push back against interest groups who want more cash for themselves or the causes they support.

So what of the GDP figures themselves? Before discussing how distorted they have become as a result of globalisation, let's break them down for clarity.

GDP figures comprise four broad categories by spending. When all four categories are totted up, we get an economy's total output: GDP. The four components are

1) spending by individuals on goods and services (private consumption);

2) spending by governments on goods and services (public consumption);

3) spending by companies on investment goods, such as machines and buildings (fixed capital formation);

4) spending by foreigners on Irish goods and services (exports), less spending by Irish residents on foreign goods and services (imports).

The first two of these remain reliable indicators of what is going on in the economy. They have not been distorted by globalisation, as the second two have, and so are still worth analysing. With all the brouhaha last week about "leprechaun economics", the aspects of the GDP figures that were significant got a little lost.

That is a pity - not least because they were positive. Private consumption, which is three to four times bigger than public consumption, is the most important component of GDP when it comes to how the domestic economy is doing. How much people spend in shops and on services is what matters most to most businesses, particularly smaller businesses that don't export and depend on the home market.

Importantly, it is a much wider measure of personal spending than retail sales, which only capture transactions in shops - missing out on the growing share of services in consumption. As the second chart shows, in the first three months of this year it grew at its fastest quarterly rate since the crash in 2008. It brings to eight the number of consecutive quarters of growth. In 2015 as a whole it expanded at more than 4.5pc, one of the highest rates among the EU 28.

That is in stark contrast to the 2010-13 period when consumers were still in a state of shock and their spending was bumping along an uncomfortable and uneven bottom.

In cash terms (adjusted for inflation), private spending has surpassed the €90bn threshold and is now about to move above the pre-crisis peak, although with a quarter of a million more people in the country now than in 2008, spend per person is still well down.

Moving to State spending on goods and services, which, in the GDP figures, does not include social transfers - this is the largest single component of the Government's budget. This shows that austerity is well and truly over. Public consumption has been on the rise since 2013, even if has not grown as rapidly as private spending more recently. As of the first quarter of this year, it stood at 2006 levels, when the population was a full half million lower than now.

So, what of the globalisation-distorted components?

Spending by companies on investment and by foreigners on Irish goods and services have been so incredibly inflated by the activities of multinationals - both non-Irish and Irish - that they no longer tell us anything meaningful about the economy's direction of travel.

Most of those distortions have little or no impact on activity. Perhaps the most important way of looking at them is to consider whether they are the result of tax avoidance or for other reasons. Though the figures don't allow that distinction to be calculated with any certainty, it seems very likely that most of the distortion is caused by tax avoidance measures, such as the huge corporate inversions discussed in this column last week.

But there are two more legitimate things that also distort the numbers. The first is the aviation leasing industry. When it buys planes that never come here but fly around other regions of the world, the purchases are added to Irish GDP numbers. A second reason is 'contract manufacturing', whereby a company in Ireland contracts a company in another country to make goods, which are shipped to a third country. These goods also end up on the GDP figures as Irish exports - even though they have never come here.

But for those who believe Ireland is a tax haven, these issues will be of little interest. Last week's numbers have only served to highlight Ireland's role in international tax avoidance.

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